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Mongolia

Mongolia

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The income tax legislation is undeveloped, comprising of a mere 12 pages. As a result, it often creates more questions than it answers, and interpretation of the legislation can be a challenge. Such uncertainty creates risk, and whilst it is sometimes possible to get a ruling from the Tax Department on a position, this does not set a binding precedent, and therefore cannot always be relied upon. Different tax inspectors can (and do), provide a different answer to the same question.

Key message

A person’s liability to Mongolian individual income tax is determined by residence status for taxation purposes and the source of income derived by the individual. For non-resident taxpayers, income tax is currently levied at a flat tax rate of 10 percent for Mongolian resident taxpayers and 20 percent on Mongolian-sourced income for non-resident taxpayers. The tax year is the calendar year.

Income Tax

Liability for income tax

Personal taxpayers in Mongolia are classified as resident and non-resident taxpayers. A resident taxpayer of Mongolia is a taxpayer who is either:

  • an individual with a residence in Mongolia
  • an individual who resides in Mongolia for 183 or more days in a tax year
  • a civil servant of Mongolia appointed to work overseas.

The 183 days period shall be calculated based on the number of days of a calendar year from the day of entry into Mongolia and in case of multiple entries, it shall be determined based on the total number of days a taxpayer stays in Mongolia. A resident taxpayer is required to pay taxes in Mongolia on both their taxable income earned in Mongolia and overseas income (i.e. their worldwide income).

Non-residents are subject to tax on certain categories of income from Mongolian sources under the concept of limited tax liability. If the income from employment is subject to personal income tax withholding, the tax obligations are fulfilled with the withholdings and no Mongolian tax return needs to be filed.

Tax trigger points

An individual will be considered a tax-resident in Mongolia if they reside in Mongolia for 183 or more days in a tax year. The 183 day period shall be calculated based on the number of days of a calendar year from the day of entry into Mongolia and in case of multiple entries, it shall be determined based on the total number of days a taxpayer stays in Mongolia.

Types of taxable income

Generally, the following remunerations and benefits are considered as employment income:

  • base salary, additional wages, overtime pay, bonuses, incentives, vacation pay, pension, allowances, and other similar income a taxpayer earns in accordance with an employment contract entered with an employer
  • allowances provided by an employer to an employee or employee’s family member and other similar income
  • gifts provided by an employer to an employee or employee’s family member
  • salaries, wages, bonuses, and incentives of members of a board of directors, control committee, part-time committee, other committees, and task force and other similar income
  • all types of bonuses and incentives issued by foreign and domestic business entities, citizens, and other entities
  • wages, bonuses, additional wages, allowances, and other similar income from employment based on contracts entered into with legal entities or individuals other than the taxpayer’s primary employment.

Other taxable income includes:

  • income from production and trade activities and professional services
  • income from property (e.g. rental income, dividends, interest)
  • income from sale of property.

A tax credit is deductible from Mongolian personal income tax of residents and non-residents who receives employment income. The amount of the tax credit depends on the individual’s level of income. No tax credit is available where the individual’s annual income exceeds 36 million Mongolian tögrög (MNT). In addition, certain income is tax exempt under the Personal Tax Law, including

  • certain employee pensions, benefits, payments, discounts and reimbursements
  • per-diem payments
  • insurance proceeds
  • payments, interest and penalties for Government notes payable (i.e. Government bonds).

Tax rates

For resident taxpayers, employment income and personal investment income (unless noted below) is currently subject to a flat 10 percent flat tax rate. For non-resident taxpayers, Mongolian sourced income is currently subject to a flat 20 percent flat tax rate.

The following income is subject to specific personal income tax on a gross basis and is subject to final withholding tax:

  • income from the sale of immovable property is taxed at 2 percent;
  • income from gambling, quiz and lottery is taxed at 40 percent
  • income from artistic performances and sport competitions is taxed at 5 percent.

Social Security

Liability for social security

The Mongolian Social Security System provides benefits such as pension, health, disability and unemployment, amongst others. Participation in Social Security is mandatory for all Mongolian nationals, foreigners and stateless persons who are employed within the territory of Mongolia.

Both employers and employees are required to pay social security contributions, at rates which are established by the Social Insurance Law of Mongolia. Employer contribution rates currently vary from 12.5 to 14.5 percent, depending on the industry. Employee contribution rates are currently 11.5 percent (from salary and similar income). However, employee monthly contributions are currently capped at MNT368,000 per month.

Employment insurance

See above.

Compliance Obligations

Employee compliance obligations

Personal income tax returns for the preceding calendar year must be filed with the local tax office by 15 February. A further filing extension is not available. The tax payment is due at the same day.

The penalty for late payment is currently 0.1 percent of the outstanding balance per day. The penalty for concealing taxable income through negligence or fraud (where criminal charges are not brought) is 30 percent of the tax payable.

Employer reporting and withholding requirements

Personal income tax payments for employees are withheld, filed and remitted to Mongolian Tax Authority by employer and by due dates. Quarterly personal income tax filing by employer is due by the 20th of the first month of the following quarter, and annual filing by employer is due by the 15th of February of the following year. However personal income tax should be paid on a monthly basis.

Employers are also responsible for withholding social security contributions and transferring them to relevant authorities. Social insurance return should be filed by the 5th of the following month and payment should be remitted within the month.

Immigration

Work permit / Visa requirements

Generally, foreigners are required to have a Mongolian visa to enter the country/territory. 

Foreigners visiting Mongolia for more than 30 days are required to register with their local Office of Immigration, Naturalization and Foreigners Registration (Immigration Office) within seven days of arrival. Failure to register may result in fines or penalties. If a foreigner is invited to visit Mongolia, the citizen, business entity or organization inviting the foreigner is responsible for registering them with the Immigration Office. Foreigners who wish to reside in Mongolia may apply for a residence permit. Residence permits are valid for up to 5 years and can be extended for an additional 3 years.

A business entity, organization or citizen can employ workers and specialists from abroad for occupations and professions requiring high professional skills. Work permits are granted for up to 1 year and can be extended based on a written request from the employer.

Quotas have been established for the number of foreign workers that can be hired in a given year. Depending on the economic sector and the size of the organization hiring the foreigner, foreigners can comprise as much as 70 percent or as little as 5 percent of the total workforce of an organization. Generally, organizations operating in the mining and construction industries can hire a higher percentage of foreign employees. Quotas are updated and approved on an annual basis by the Government.

Other Issues

Double taxation treaties

Mongolia has approved tax treaties with several countries/territories.

For the avoidance of double taxation, Mongolia proposes to use the credit method. The amount of foreign tax paid is allowed as a credit against the Mongolian tax payable on the same income or capital. However the amount of such tax credit shall not exceed the amount of tax payable on the same amount of income in Mongolia.

Permanent establishment implications

When an organization wishes to establish a presence in Mongolia, ultimately for the purposes of making a profit, operating via a Mongolian subsidiary is the only possibility. Whilst the concept of permanent establishment (PE) exists, there are no practical examples. Also, operating through a branch structure is only permitted for Mongolian resident companies. Since a Representative Office is prohibited from engaging in business activities, it would not be appropriate either.

Indirect taxes

Under the VAT Law, a VAT payer is defined as a legal entity, an individual or a PE of a foreign entity, who sells goods, services and works subject to VAT.

The threshold to be registered as a VAT withholding agent is MNT50 million; for this purpose, revenue from the sale of fixed assets shall not be counted. An entity that meets the threshold shall submit its application to register as a VAT withholding agent to a relevant tax authority within 10 working days.

A person or legal entity, whose sales revenues from primary production, work and service subject to VAT has reached MNT10 million can be registered voluntarily.

VAT is imposed on goods imported into and exported out of Mongolia and goods produced or sold, work performed or services provided in Mongolia. Goods and services sold or provided in Mongolia are taxed at a rate of 10 percent. Exported goods, works and services are zero rated for VAT.

Input VAT paid on purchases of goods, services and works provided for the purposes of production and services, and VAT paid for goods, works or services directly imported for the purpose of sale, production and providing services can be credited against Output VAT.

Income earned by non-resident entities is subject to 10 percent WHT VAT in Mongolia. The WHT VAT is not creditable for Mongolian entities which are receiving the services or goods from the non-resident entities.

Transfer pricing

Transactions between related parties must be fair value for tax purposes. Where the tax authority does not consider that a transaction has been undertaken at fair value, the tax authority has the power to determine appropriate fair values, using a benchmarking methodology approved by the Government.

Where the related party rules apply then a “benchmark price” applies. The benchmark pricing methodology follows the Organisation for Economic Co-operation and Development (OECD)OECD approach to transfer pricing. Under the CIT law, entities will be considered ‘related parties’ for tax purposes where any of the following criteria is met:

  • an entity that holds at least 20 percent of the common stock of another entity
  • an entity that has the right to receive at least 20 percent of the dividends or distributions from the other entity
  • an entity that has the right to appoint at least 20 percent of the management or otherwise determine the other entity’s policies.

According to General Tax Law of Mongolia “related parties” refers to entities authorized to directly and indirectly participate in management, control and property rights of any foreign and Mongolian legal entities.

Local data privacy requirements

NA.

Exchange control

All business transactions in Mongolia are legislatively required to be settled in MNT. However, it is not unusual for prices to be quoted in other currencies (predominantly US dollars (USD)), particularly in international trade and the tourism industry.

Currency regulation shall apply on transactions between two resident companies. The currency law clearly states that the “price of goods, work and service shall be expressed and settlement shall be conducted only in national currency within territory of Mongolia, and it is prohibited to set price, carry out settlement and run advertisement in foreign currencies or settlement units without official approval from Bank of Mongolia”.

Non-deductible costs for assignees

None. General principles stated above apply for assignees too.

 

All information contained in this document is summarized by KPMG Tax TMZ LLC, the Mongolian member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity, based on

  1. Personal Income tax Law of Mongolia (2006)
  2. Social Insurance law of Mongolia (1994)
  3. Law on legal status of foreign citizens (2010)
  4. Corporate Income tax law (2006)
  5. Value added tax law (2015)
  6. Mongolian currency law (2009)
  7. the Website of Immigration Authority

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